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Identifying Dependence Structure among Equities in Indian Markets using Copulas

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  • Grover, Vaibhav

Abstract

In this study we have examined that assets returns in Indian markets do not follow an elliptical dependence structure; asymmetric tail dependence can be observed among asset returns particularly when the assets exhibit downside returns in a bearish market. We have used Elliptical, Archimedean and Canonical Vine copulas to model such dependence structure in large portfolios. Using certain goodness-of-fit tests we find that Archimedean copulas are insufficient to model the dependence among assets in a large portfolio. We have also compared copula models using an out-of-sample Value-at-Risk (VaR) calculation and comparing results to the historical data. It is observed that the Canonical Vine copulas consistently capture the variation in weekly and daily VaR values.

Suggested Citation

  • Grover, Vaibhav, 2015. "Identifying Dependence Structure among Equities in Indian Markets using Copulas," MPRA Paper 66302, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:66302
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    References listed on IDEAS

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    6. Brechmann, Eike Christian & Schepsmeier, Ulf, 2013. "Modeling Dependence with C- and D-Vine Copulas: The R Package CDVine," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 52(i03).
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    10. Low, Rand Kwong Yew & Alcock, Jamie & Faff, Robert & Brailsford, Timothy, 2013. "Canonical vine copulas in the context of modern portfolio management: Are they worth it?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3085-3099.
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    Cited by:

    1. Magnolia Sosa Castro & Christian Bucio Pacheco & Héctor Eduardo Díaz Rodríguez, 2021. "Extreme Volatility Dependence in Exchange Rate," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 40(82), pages 25-55, February.
    2. Magnolia Miriam Sosa Castro & Christian Bucio Pacheco & Alejandra Cabello Rosales, 2018. "Contagion and Stock Interdependence in the BRIC+M Block," Economía: teoría y práctica, Universidad Autónoma Metropolitana, México, vol. 48(1), pages 173-196, Enero-Jun.

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    More about this item

    Keywords

    copula; vine copulas; Value-at-Risk;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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